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A critical
A critical examination of the examination
EO-performance relationship
Jim Andersén
Swedish Business School at Örebro University, Örebro, Sweden 309
Received May 2008
Abstract Revised December 2008
Purpose – The purpose of this paper is to critically analyze the assertion that there is a statistical Accepted June 2009
significant relationship between EO and performance.
Design/methodology/approach – In several publications it has been stated that there is a positive
relationship between entrepreneurial orientation (EO) and the performance of a firm. These studies
have generally used the same core references, and these seminal contributions are examined critically
in this article. The EO-performance relationship is also analyzed in an empirical study, consisting of
172 Swedish SMEs in the manufacturing sector.
Findings – The result of the literature review is that the notion of a positive EO-performance
relationship can be questioned. Earlier studies have neglected some important issues, mainly
regarding the use of perceptual performance data, common method biases and survival biases. Some
of the conclusions presented are supported by the empirical study.
Originality/value – The main point of this paper is to show that the relationship between EO and
performance is more complicated than previous studies have implied. More care should be taken when
generalizing the results of core references and scholars ought to have a more cautious approach when
stating that there is a general correlation between EO and performance.
Keywords Entrepreneurialism, Multivariate analysis, Research methods, Organizational performance,
Small to medium-sized enterprises
Paper type Case study

1. Introduction
The concept of entrepreneurial orientation (EO) (Lumpkin and Dess, 1996, 2001) has
received considerable interest in contemporary entrepreneurship research. EO
generally refers to a firm’s propensity to take risks, to be proactive, and to be
innovative (Wiklund, 1999). The attributes used to measure the level of EO are
generally based on the scale developed by Miller and Friesen (1982) and refined by
Covin and Slevin (1989) (Brown et al., 2001; Covin et al., 2006).
The development of a scale to measure the level of EO has made it possible to
untangle the complex causality between entrepreneurship, as defined in the EO
construct, and performance. In several recently published articles (listed in Table I), it
has been stated that earlier research (listed in Table II) has identified positive
correlations between EO and performance. As in all fields of research, a new theory, or
in this case a proposition, is generally built on some core references. The increasing
International Journal of
number of contributions makes it important to go back to the frequently referred-to Entrepreneurial Behaviour &
studies that have claimed to have found evidence for a relationship between EO and Research
Vol. 16 No. 4, 2010
performance and to examine the elements of these studies. This is necessary in order to pp. 309-328
develop a solid foundation and a rigorous point of departure for future studies in which q Emerald Group Publishing Limited
1355-2554
different aspects of the relationship are analyzed. DOI 10.1108/13552551011054507
IJEBR
Authors
16,4
Chow (2006, p. 13)
310
Covin et al. (2006, p. 73)
Hughes and Morgan (2007,
p. 651)
Jantunen et al. (2005, p. 226)
Kazem and van de Heijden
(2006, p. 22)
Keh et al. (2007, p. 594)
Krauss et al. (2005,
pp. 316-317)
Madsen (2007, pp. 186/188)
Table I. Naldi et al. (2007, p. 36)
Articles published
2004-2007 with references
to studies that examined
the EO-performance
relationship
Quote Reference
Research studies consistently Zahra (1991); Zahra and Covin
showed support for a positive (1995)
relationship between
entrepreneurial orientation and
firm performance and sales growth
Empirical results provided Smart and Conant (1994); Zahra
evidence of a strong relationship (1993)
between entrepreneurial orientation
and revenue generated by the
firm. . .
. . .and such relationships increased Wiklund (1999)
over time
Prior longitudinal research Zahra and Covin (1995)
suggests that EO has a positive
impact on firm performance
Research efforts since then have Wiklund (1999); Wiklund and
repeatedly sought to prove that EO Shepherd (2003, 2005); Zahra
carries valuable rewards in terms (1991); Zahra and Covin (1995)
of business performance. Several
studies have reported positive
associations
Entrepreneurial orientation has Zahra and Covin (1995); Wiklund
been found to lead to improved and Shepherd (2005)
performance
The entrepreneurial orientation of Entrialgo et al. (2001); Hult et al.
the owner or manager has been (2003); Ibeh (2004); Kickul and
found to have a sustainable Gundry (2002); Wiklund (1999)
positive relationship with
performance and competitiveness
In entrepreneurship research, Covin and Slevin (1989); Smart and
entrepreneurial orientation has Conant (1994); Wiklund (1999)
been found to have a positive
impact on firm performance
On the firm level, however, EO Covin and Slevin (1989); Miller
research accumulated a (1983); Venkatraman (1989);
considerable body of evidence on Wiklund (1998, 1999); Zahra (1991)
the relationship between EO and
business performance
Studies of this issue have generally Zahra and Covin (1995); Brown
demonstrated that entrepreneurial (1996); Junehed and Davidsson
orientation has a positive impact on (1998); Wiklund (1999)
firm performance
Most empirical studies support the Zahra (1991); Wiklund (1999)
proposition that the relation
between a firm’ s EO and
performance is positive, i.e. that
firms which adopt a more
entrepreneurial strategic
orientation perform better
The most recurrent theme among Lumpkin and Dess (1996); Wiklund
those interested in EO concerns the (1998); Zahra et al. (1999)
positive implications that
entrepreneurial processes have on
firm growth and performance
(continued)
Authors Quote
Poon et al. (2006, p. 65) At the empirical level, past studies
have shown positive relationships
between entrepreneurial orientation
and firm performance
There is some evidence that
entrepreneurial orientation is
significantly related to firm
performance
Walter et al. (2006, p. 549) Empirical results suggest that
corporate entrepreneurship
improves firm performance
Wiklund and Shepherd Previous empirical results provide
(2003, p. 1309) support for a positive relationship
between EO and performance
Wiklund and Shepherd Studies have found that those
(2005, p. 73) businesses that adopt a more
entrepreneurial strategic
orientation perform better
Reference
A critical
examination
Frese et al. (2002); Hult et al. (2004);
Lee et al. (2001); Smart and Conant
(1994); Swierczek and Ha (2003a);
Wiklund (1999); Wiklund and
Shepherd (2005); Yusuf (2002)
Becherer andMaurer (1997, 1999); 311
Smart and Conant (1994)
Lumpkin and Dess (1996); Zahra
(1991, 1993)
Wiklund (1999)
Wiklund (1999); Zahra (1991);
Zahra and Covin (1995)
Table I.

Several studies have examined the moderating role of EO on the performance of firms
by using different contingency and configuration approaches. The level of dynamics in
the product market or environmental uncertainty has, for example, been found to have
a key role in determining the importance of EO (Attahir, 2002; Dess et al., 1997;
Wiklund and Shepherd, 2005). Other scholars have argued that EO can make the
resource-based view of the firm more dynamic, when used to describe how resources
are acquired (Andersén, 2007) or organized (Wiklund and Shepherd, 2003). Although it
is important to analyze the moderating role of EO, these notions are not challenged in
this paper. The key question that is addressed in this study is whether or not EO alone
has an effect on the performance of a firm, based on evidence from the core references.
Thus, the purpose of this study is to critically analyze the assertion that there is a
statistically significant relationship between EO and performance. In this article, I
concentrate on identifying the core references and on examining these studies
critically. In addition to this, the result of yet another study on the relationship between
EO and performance in SMEs will be presented. The remainder of this paper is
organized as follows. Section 2 provides a critical analysis of the core references. This
section constitutes the main contribution of this paper. The methodology and the
results of the empirical study are presented in Section 3, and the concluding discussion
is presented in Section 4.

2. Analysis of the core references

In order to identify the core references, articles from established entrepreneurship
journals during the period 2004-2007 with references to studies that examined the
relationship between EO and performance were analyzed. The publications covered
were the 15 leading entrepreneurship journals according to the John Carroll University
ranking (see McElwee and Atherton, 2005). In addition to these journals, articles in
other peer-reviewed journals that specifically analyzed some aspect of the
 16,4

312
IJEBR

Table II.
Core references
Objective or
Company Number of Performance perceptual
Author(s) size companies measurement performance Scale Period analyzed Industry

Zahra (1991) Fortune 119 Combination of EPS, Objective Own, Three years Manufacturing
500s ROI, net income sales, entrepreneurship þ
RA additional measures
Zahra and 6,263 108 Combination of ROA, Objective Miller and Friesen, Six years Manufacturing,
Covin (1995) (average) ROS, GR seven items chemical and Fortune
500 corps.
Smart and 11 599 Combination of seven Perceptual Own, six items One time occasion Retail
Conant (average) measures
(1994)
Wiklund 10-49 132 Combinations of eight Perceptual Miller, eight items Two years Various
(1999) growth and profit
measures
Wiklund and 10-49 413 Combination of eight Perceptual Miller, eight items One time occasion Knowledge-intensive
Shepherd profit and growth (dependent variables manufacturing, labor-
(2005) measures lagged one year) intensive
manufacturing,
professional services,
and retail
EO-performance relationship were included. The result of this review is presented in A critical
Table I and the core references identified, based on this review, are listed in Table II. examination
As illustrated in Table I, the references that re-occur are:
. Wiklund and Shepherd, 2005 (referred to three times).
.
Smart and Conant, 1994 (three times).
.
Zahra, 1991 (six times). 313
.
Zahra and Covin, 1995 (six times).
.
Wiklund, 1999 (nine times).

So let us examine these five frequently referred-to studies, published by six scholars.
These contributions can be regarded as constituting the basis of the EO-performance
relationship. The content of the studies is summarized in Table II. All five studies
examined the relationship between EO and performance, and argued for a statistically
significant relationship between the two. The five studies had a number of limitations,
however, which will now be addressed. The issues mainly involve five considerations:
(1) the independent variable (EO);
(2) the dependent variables (performance);
(3) the use of perceptual dependent variables;
(4) differences between small firms and large corporations; and
(5) survival rates for entrepreneurial firms.

These different issues will now be discussed.

Differences regarding the independent variable

In order to analyze the relationship between EO and performance, it is of course
essential to use similar methods to operationalize EO, i.e. to use similar attributes in
order to measure EO. The studies conducted by Zahra and Covin (1995), Wiklund
(1999), and Wiklund and Shepherd (2005) used similar scales to measure EO. This scale
(generally referred to as the Miller scale) or a refinement of the scale – done by Covin
and Slevin (1989) – has been used in numerous recent publications (e.g. Attahir, 2002;
Becherer and Mauer, 1997, 1999; Covin et al., 2006; De Clercq et al., 2005; Jogaratnam
and Tse, 2006; Kellermanns and Eddleston, 2006; Naldi et al., 2007). Smart and Conant
(1994) used a six-item scale to measure EO. Questions regarding the existence of
strategic planning activities and the ability to identify customer needs were included in
the questionnaire. Such questions have not been used in other studies examining the
EO-performance relationship. However, the items also covered issues such as
risk-taking, innovation, and opportunity recognition (i.e. traditional measures of
entrepreneurship).
A study that stands out even more is the one published by Zahra (1991). This study
explores corporate entrepreneurship and the questions and issues concerning EO that
large corporations are faced with, e.g. encouragement of employees to be creative by
established reward systems, having a department responsible for innovation and
corporate development, training of managers in creativity and innovation techniques,
designation of managers as champions of new ideas, number of joint ventures, number
of new businesses, and so on. The scale developed by Zahra (1991) is very interesting
IJEBR in its mix of different aspects of entrepreneurial qualities and actions, and it is strange
16,4 that the scale has not been used more often in later studies. The Zahra items are,
however, very different from the Miller/Friesen/Covin/Slevin scales and measure
entirely different aspects of entrepreneurship. The appropriateness of referring to the
Zahra (1991) study when analyzing EO, as defined and described by Miller and Friesen
(1982) or Covin and Slevin (1989), is highly questionable. Also, the questions asked in
314 the Zahra (1991) study are of little relevance when considering entrepreneurship in
small- or medium-sized companies. Other issues regarding differences between small
and large firms will be addressed later in this paper.

The concept of performance

A general problem when analyzing a concept such as the performance of a company is
that there is no general definition of performance. As illustrated in Table II, the
performance measurements can roughly be divided up into two categories in terms of
what is being measured and how it is being measured. The “how”-question will be
addressed in the next section and concerns whether performance is measured by
objective data (for example, annual reports) or subjective data (i.e. self-reported
estimation by the respondent).The “what”-question concerns how the concept of
performance is defined. Table II shows the performance dimensions used in the core
references. These dimensions can be divided into profit measures, growth measures,
combination measures, and industry-specific measures.
All five studies used a combination of several performance measures. Thus, the
objective of the studies was to take the concept of EO as the point of departure and to
show that EO has an effect on performance in general. With the exception of the study
by Zahra and Covin (1995), all contributions mainly used growth measures and
profitability measures, and combined these into an overall performance index. Zahra
and Covin (1995) combined return on assets, return on sales, and growth in revenue
into a single performance indicator. Thus, the study also combined profitability and
growth measures. However, by only analyzing returns and growth in returns, the
Zahra and Covin (1995) study stands out from the other four core references as being
different. With the exception of the study conducted by Smart and Conant (1994), all
studies used established measurements of performance (for example, return on assets,
growth in sales etc.). Smart and Conant (1994) included industry-specific dependent
variables such as sales per square foot and overall store performance/success.
Thus, although different in the specific choice of measures and the combination of
measures, at least four of the studies mainly define performance as a combination of
growth and profitability measures. In order to obtain an accurate picture of the “overall
performance” of a company, several different measures must be included, regarding for
example growth, efficiency and profitability, and as expressed by Wiklund (1999, p. 40):
“Taken together, growth and financial performance give a richer description of the
actual performance of the firm than each does separately”. This is indeed a correct
statement, but does this really mean that we will get a richer description if growth and
profitability measures are mixed together into a grand overall performance indicator?
The correlation between growth and profitability is, for example, not always apparent
(Dawes, 1999) and other studies (e.g. Murphy et al., 1996) have shown that there is no
correlation between several performance measures used in the core references; in some
cases, there is a negative correlation between them. Also, the managerial implications
from the core references are limited due to the combined performance indices that were A critical
used. By using such an aggregated index, it is not possible to advise a company on examination
whether or not to adapt a more entrepreneur-oriented strategy in order to achieve a
specific goal. Instead, we need to know which, if any, performance dimensions are
influenced by EO. Another problem in using such combined performance indices is
that the studies are difficult to repeat. The weakness of a combined performance index
can be summarized by the following assertion from Murphy et al. (1996, pp. 21-22): 315
. . . the lack of construct validity for what we call performance is so clear that we as a field
should consider discontinuing the use of the term in research. It would be more precise and
much more informative to discuss the relationship between a given independent variable and
a given performance dimension (e.g., the relationship between entry strategy and growth or
profitability). The number of studies with conflicting results might be reduced and a better
basis for building theory would be provided.
So far, this discussion has considered the problems in using a combined performance
index. Another essential question is whether or not the performance indicators used
actually represent a true reflection of reality.

Perceptual dependent variables

Two of the five core references used objective items to measure performance. The
study conducted by Zahra (1991) was one of the studies that used objective
performance data. As described previously, the measurement of EO differed so much
from the other core references – as well as from more recent publications in EO – that
it is questionable whether it was an analysis of EO as defined by Zahra and Covin
(1995) or by Wiklund (1999; Wiklund and Shepherd, 2005). Thus, the Zahra and Covin
(1995) study was the only one of the EO-related core references that used objective
performance data. This means that the majority of the most referred-to references
(Smart and Conant, 1994; Wiklund, 1999; Wiklund and Shepherd, 2005) are based on
perceptual performance data. The use of self-reported performance information gives
rise to two inter-related methodological problems:
(1) the use of same-source data (i.e. data regarding performance and EO collected
from the same respondent); and
(2) the use of perceptual performance data (the performance assessment made by
the respondent).

There are some general concerns regarding the use of same-source data and perceptual
performance in business research. In some studies (Dess and Robinson, 1984;
Venkatraman and Ramanujam, 1987; Wall et al., 2004), the perceptual performance of a
company has been found to be positively correlated to actual performance. However,
other studies have failed to provide any evidence of such a relationship (Sapienza et al.,
1988), and several scholars (Bommer et al., 1995; Dawes, 1999; Murphy and Callaway,
2004) have described the limitations of treating subjective data as a replacement for
objective data, for example by asking questions regarding ROA. The use of
same-source data has also been a widely debated issue. Some scholars have harshly
criticized the use of same-source data (Campbell, 1982), and others have stated that the
common method variance problem is exaggerated (Spector, 2006). One can, at least,
conclude that the use of same-source data is quite controversial and several studies
IJEBR have illustrated the problems associated with same-source data (see for example
16,4 Harrison et al., 1996). Boone and de Brabander (1997, p. 965) do, for example, state that
their “empirical findings, however, illustrate that the methodology used (i.e.
same-source self-report) makes the interpretation of any relationship between the
variables of interest extremely difficult” and that “ideally, organizational outcomes
should be assessed by means of ‘objective’ data”. The notion of using objective data
316 when available has also been put forward by scholars who accept perceptual data (e.g.
Dess and Robinson, 1984).
In my opinion, when measuring a concept such as EO in combination with
perceptual and same-source data, researchers are faced with even more problems. It is,
for example, not unlikely that entrepreneurial-oriented managers possess traits that
differ from those of other managers (see, for example, Reynierse et al., 2000). One
possible explanation for the perceptual performance-EO correlation identified in the
core references (other than the presence of an actual relationship between EO and
objective performance) could, for example, be that managers with a more positive
attitude generally adopt entrepreneur-oriented strategies, and also overestimate the
performance of their own firm. Several authors have identified the importance of
cognitive processes and differences in perception when it comes to undertaking risky
ventures. Koellinger et al. (2007) found that there is a significant negative relationship
between entrepreneurial confidence and survival rates of newly founded firms, and
individuals that choose to launch new ventures have other perceptions of the risks
associated with starting a new company (Simon et al., 2000). Palich and Bagby (1995)
achieved similar results for existing ventures and concluded that entrepreneur-oriented
managers generally do not see themselves as risk-takers; however, due to differences in
the cognitive structure they tend to perceive lower levels of risk than others. Other
studies have shown the importance of perceptual biases of managers regarding
risk-taking (Krueger and Dickson, 1994) or the general importance of cognitive
processes for the performance of a firm (Bourgeois, 1985; Penrose, 1959; Porac and
Thomas, 2002). These differences, especially the differences between entrepreneurs
and others, in cognition and perception are extremely interesting when analyzing the
relationship between EO and performance. Thus, due to differences in cognitive
factors, it is possible that the optimism of entrepreneur-oriented managers has an effect
on their assessment of, for example, performance (i.e. by over-rating their profitability,
growth etc.).
The problems associated with using perceptual same-source performance data
when analyzing the EO-performance relationship can result in three possible reasons
for identification of a positive correlation:
(1) entrepreneur-oriented (thus, risk-oriented) managers exaggerate their
performance more than less entrepreneur-oriented managers;
(2) some respondents tend to give high or low scores in general in surveys, and
(3) there actually is a correlation between EO and objective performance (i.e. that
the perceptual self-reported performance reflects the objective performance).
As stated previously, the only core reference (dealing with the dominant EO concepts)
that used objective performance data was the study by Zahra and Covin (1995). The
other studies are likely to be marred by the problems associated with using perceptual
and same-source data.
Small firms and large corporations A critical
The size of the companies analyzed varied between the studies. As illustrated in examination
Table II, two of the core references examined large companies consisting of Fortune
500 companies (Zahra, 1991) and companies with an average number of employees of
over 6,000 (Zahra and Covin, 1995). The samples in the other studies consisted of firms
with 10-49 employees (Wiklund, 1999; Wiklund and Shepherd, 2005), and with an
average of 11 employees (Smart and Conant, 1994). It makes sense to refer to studies 317
that have used samples of both small and large firms when using statements
exemplified in Table I, which is that EO generally has a positive effect on the
performance of a firm. It is, however, questionable whether it is possible to generalize
the results from one context to another (i.e. from large to small firms or vice versa).
Large and small firms are faced with completely different challenges (Beaver, 2003)
and organizational size has been identified as a key contingency variable (Donaldson,
2005). Thus, small firms and large corporations usually have to adopt different types of
strategies in order to achieve high performance (Ballantine et al., 1993; Fiegenbaum
and Karnani, 1991). Companies of different sizes do, for example, require different
innovation strategies to be successful (Wagner and Hansen, 2005) and face completely
different managerial and technical problems in developing innovations (Knight, 1989).
Other studies have shown that small and large companies must adapt different
manufacturing strategies in order to generate high profits (Zahra and George, 2000).
This illustrates that it is not always possible to extrapolate the results from studies
conducted on large firms to small firms. Thus, the results of the studies conducted by
Zahra (1991) and Zahra and Covin (1995) may not be applicable to small firms. As
stated in the previous section, all core references with small firms as samples used
perceptual performance data and may have been subject to inaccurate performance
data.

Survival rates for entrepreneurial firms

Perhaps the most critical factor concerning the relationship between EO and
performance is the correlation between risk-taking strategies and failure. Zahra and
Covin (1995) established that the (high number of) firms in their study that were
dropped in the analysis due to mergers, acquisitions, bankruptcies etc. did not differ
from their sample in terms of age, number of employees, or value of assets. However,
differences in EO were not analyzed. In the longitudinal study conducted by Wiklund
(1999), the original sample was reduced from 808 to 132 cases (!). The reasons for this
reduction are not clear, and the differences between the firms removed from the initial
sample and the effective sample were not analyzed. Wiklund and Shepherd (2005) also
reduced their original sample due to changes of executive managers and firms that had
gone out of business. Zahra (1991) did not present a thorough analysis of the reduced
sample in his study. All the data in the Smart and Conant (1994) study were collected
on one occasion.
The risk-taking dimension of EO is by definition associated with a higher risk of
failure, but – and as illustrated by the high Cronbach’s alpha value of the EO construct
– innovation and proactiveness are also associated with risk-taking and failure. At
worst, failure can result in bankruptcy and the firm ceasing to exist. When conducting
longitudinal studies, such as those of Wiklund (1999) and Zahra and Covin (1995), the
entrepreneurial-oriented firms are more likely to fail due to their propensity to take
IJEBR risks. On the other hand, if these firms are more profitable than the rest of the sample
16,4 they can also be subject to mergers or acquisitions of other firms, because of their
higher profits or superior resources. Even so, when analyzing a concept such as risk it
is essential to conduct a thorough analysis of less successful firms also. It is, of course,
common sense to understand that taking great risks can result in great rewards – and
by only analyzing survivors, the less successful firms are not included. Thus, less
318 successful entrepreneurial-oriented firms can be under-represented in the final samples
in several of the core references. There is, for example, a significant negative
correlation between risk-takers and survival rates (Koellinger et al., 2007).
The issue addressed above concerns the problems of conducting longitudinal
studies of EO and performance, without a thorough analysis of non-respondents or
firms that have ceased to exist. However, the problems of analyzing risk-taking and the
effects on survival are also present when conducting non-longitudinal studies. The
companies in the core references are generally not newly founded ventures, and the
entrepreneurial firms in the studies have obviously managed to survive and adopt
successful risk-taking strategies. By neglecting the possible, and most likely plausible,
correlation between risk-taking and failure, however, scholars overlook a crucial aspect
of the EO-performance relationship. The issue of survival bias is mentioned in some of
the core references. Wiklund and Shepherd (2005) did, for example, state that survival
bias is a limitation of their study and maintained that their study could only be
generalized to surviving companies. However, this limitation ought to be examined in
much greater detail. As previously argued, there is limited usefulness in only being
able to generalize results to surviving firms when analyzing the relationship between
EO and performance.

3. Empirical study of the relationship between EO and performance

The weaknesses described in the core references make it interesting to conduct an
empirical study in which some of these weaknesses are taken into consideration. The
study presented here uses a sample similar to the sample used by Wiklund (1999) and
Wiklund and Shepherd (2005), i.e. small- and medium-sized Swedish manufacturing
companies. In contrast to the Wiklund studies, however, this study uses objective
dependent variables and several separate performance measures. The aim of this study
is to investigate the accuracy of the following hypothesis: “EO has a significant
positive effect on the performance of small firms in terms of return on assets, return on
sales, average growth in number of employees, average growth in sales or overall
performance”.

3.1. Research method

In this section, a description of the research method regarding sample and variables is
presented.
Sample. A mail survey was sent out to all manufacturing companies with 1-250
employees in Södermanland County, Sweden. Companies that had changed
owner/manager sometime during the previous four years were excluded from the
sample. The survey was sent out in 2005. The total number of companies contacted
was 420 and the non-respondents received two follow-up letters. The response rate was
49 per cent; thus, the number of firms that responded was 205. Of the respondents, 19
did not answer all the questions regarding EO and 14 companies had insufficient or
unclear financial data. These companies were removed from the sample. Thus, the A critical
effective sample consisted of 172 firms – 41 per cent of the original sample. Of the examination
respondents, 14 were newly founded, thus making it impossible to measure the annual
growth. Three companies could be classified as outliers regarding growth (for example
by having an annual growth exceeding 400 per cent) and were also excluded from the
growth-sample. The sample for measuring the growth dimensions thus consisted of
155 firms. This sample was also the object of analysis of the total performance 319
analysis.
Analysis of differences (using ANOVA) between the effective sample(s) and all the
companies contacted was conducted regarding the dependent variables and no
significant differences were identified. The effective sample consisted of 56 per cent
micro-firms (1-9 employees), 30 per cent small firms (10-49 employees), and 14 per cent
medium-sized companies (50-250 employees).
Dependent variables. As previously discussed, an overall performance index is not
always appropriate when analyzing a concept such as the performance of a firm. Thus,
it generally makes more sense to disaggregate the performance concept in order to
analyze the correlation between the independent variables and profitability or growth
(Murphy et al., 1996). However, due to the fact that all core references used aggregated
performance measures, it is also interesting to use an overall performance measure. In
this study, five dependent variables are analyzed in separate regression models.
Average return on assets (ROA) and average return on sales (ROS) are used to measure
profitability. Average annual change in number of employees and average annual
change in sales are used to measure growth. A combination of ROA and growth in
sales are used to measure the total performance. These measures are very common in
entrepreneurship and small firm research (Murphy et al., 1996). Other common
profitability measures are return on investment (ROI) and return on equity (ROE).
However, when using objective data, differences in the solvency ratios have such a
great effect on these figures that it is difficult to conduct statistical analysis of ROI and
ROE. The profitability averages were based on the profitability from a period of four
years (2001-2004). ROA was calculated by dividing net profit by total assets, and ROS
was calculated by dividing net profit by sales. The growth measures were based on the
same period of time and the percentage average annual change in sales and number of
employees was used to measure these variables. For the combined measure, the
differences between the mean of growth in sales and ROA were used to transform the
growth in sales data in order to achieve comparable scales. The two measures were
then added into an overall performance measure. All dependent variables were
collected from annual reports from the companies; thus, all dependent variables are
objective. As for all other variables, the dependent variables passed the tests of
normality, linearity and homoscedasticity. The ROS-value had the highest kurtosis (of
all variables) with a value of 1.46 and growth in sales (0.88) was the most skewed.
These values are both at an acceptable level (Hair et al., 2006).
Independent variables. The scale developed by Covin and Slevin (1989) was used to
measure EO. This scale is a refinement of the Miller and Friesen scale and consists of
nine items concerning risk-taking, innovation and proactiveness. In some studies,
competitive aggressiveness and autonomy are also included in EO. However, the scale
developed by Covin and Slevin is the most common in the EO-literature (Covin et al.,
2006). As reported in several earlier studies, the scale had a high internal consistency
IJEBR with a Cronbach’s alpha value of 0.79. The components of EO (i.e. risk-taking,
16,4 innovation, proactiveness) were also analyzed separately.
Control variables. All companies in the study were manufacturing companies. Thus,
they were all part of the same industry. Although it is very common to use quite broad
definitions of industry (Wiklund (1999) and Madsen (2007) are two of several EO
studies with such definitions), the manufacturing industry consists of numerous
320 sub-industries. However, ANOVA analysis based on Swedish SNI codes (similar to the
US SIC classification) did not reveal any significant differences in the dependent
variables between the sub-industries, and (sub-) industry was therefore not used as a
control variable. Besides industry, the most frequently applied control variables in
entrepreneurship research are size and age (Murphy et al., 1996). Number of employees
and date of registration of the company were used to measure these items. Both control
variables were collected from official records (i.e. official financial statement of number
of employees and date of registration). However, juridical reconstructions are quite
common and the date of registration does not always give an accurate picture of the
actual date of when the company was founded. Even so, date of registration is the only
realistic way of obtaining objective information regarding the age of a firm and it was
therefore used to measure this variable. There are, of course, other control variables as
well, for example industry uncertainty. However, these variables are generally based
on self-reported subjective information. In order to eliminate the elements of
subjectivity (i.e. – by only measuring EO by self-reports), all control variables are
based on objective data.

3.2. Results
The correlation matrix and descriptive statistics are given in Table III and the five
regression models are presented in Table IV.
In the correlation matrix, the only statistically significant EO-relationship is
between EO and company size. Also, proactiveness was related to growth in sales and
overall performance. From analysis of the five regression models, the lack of
significant causality between EO and the dependent variables is evident. Two of the
models have significant F-values (growth in number of employees and growth in
sales). This is however caused by the strong correlation between age and growth.
When EO was removed from the regression models, the adjusted R 2 value only
decreased 0.1 per cent (from 0.042 to 0.041) (Growth in number of employees) and 0.3
per cent (Growth in sales). Thus, from this sample no correlation between EO and
performance can be identified. In this specific context, there is no significant
relationship between EO and profitability or between EO and growth.
One interesting aspect of the result is that Wiklund (1999) did find positive
correlations between EO and performance when analyzing small Swedish
manufacturing companies (i.e. a similar sample to that used in this study). Wiklund
(1999) did not provide a correlation matrix; however, Wiklund and Shepherd (2005)
found a significant relationship between EO and performance in their correlation
matrix (i.e. a relationship without control variables etc.).
In contrast to Wiklund (1999) and Wiklund and Shepherd (2005), the study
presented here uses objective performance data and several, aggregated as well as
non-aggregated, performance indicators.
Variables Mean SD 1 2 3 4 5 6 7 8 9 10 11

1. ROA 5.58 8.12 1.0

2. ROS 3.67 4.83 0.81** 1.0
3. Growth-employees 1.97 1.21 0.10 0.03 1.0
4. Growth-sales 4.87 1.00 0.10 0.05 0.38** 1.0
5. Overall performance 9.56 1.43 0.72** 0.55** 0.34** 0.76** 1.0
6. EO 3.69 1.08 0.01 2 0.03 0.09 0.14 0.13 1.0
7. Innovativeness 3.73 1.42 2 0.04 20.05 0.05 0.11 0.12 0.84** 1.0
8. Proactiveness 3.74 1.12 0.08 0.03 0.13 0.17* 0.19* 0.84** 0.53** 1.0
9. Risk-taking 3.59 1.19 2 0.02 20.05 0.04 0.06 0.02 0.85** 0.56** 0.61** 1.0
10. Firm Age (ln) 2.53 0.92 0.06 0.04 2 0.22** 20.23 2 0.11 20.01 2 0.02 0.05 2 0.06 1.0
11. Firm Size (ln) 2.07 1.36 0.03 20.05 2 0.07 0.18* 0.16* 0.30** 0.20** 0.33** 0.24** 0.18* 1.0
Notes: * p , 0.05; ** p , 0.01
A critical

correlations
examination

Descriptive statistics and

Table III.
321
IJEBR
Dependent variable ! Growth – Growth – Overall
16,4 (Std beta coef.) ROA ROS employees sales performance

Firm size (ln) 0.02 20.05 2 0.09 0.17 0.14

Firm age (ln) 0.06 0.05 2 0.21** 2 0.23** 2 0.11
EO 0.00 20.01 0.09 0.06 0.08
322 R2 0.00 0.01 0.06 0.09 0.05
Adjusted R 2 2 0.01 20.01 0.04 0.07 0.03
F-statistics 0.24 0.28 3.25* 4.92** 2.35
Table IV.
Linear regression models Notes: * p , 0.05; ** p , 0.01

4. Discussion and conclusions

Based on the review of the core references, one can conclude that the study conducted
by Zahra and Covin (1995) was the most rigorous from a methodological point of view.
In their study, several factors that can have an effect on the validity were analyzed and
discussed. However, that particular study had some weaknesses also, especially
regarding the lack of analysis of companies that had ceased to exist. Both studies that
had used objective data (Zahra, 1991; Zahra and Covin, 1995) examined corporate
entrepreneurship. In fact, the term used in these studies was corporate
entrepreneurship (CE) and not EO. As discussed, there are several problems
associated with using perceptual data and same-source information when measuring
EO and performance. Entrepreneurial managers may, for example, be more likely to
have a more positive attitude and optimistic perceptions of performance than others.
Highly aggregated and different performance indices and different EO scales are other
weak points associated with some of the core references. However, ignoring the
relationship between risk and failure is likely to be the most problematic aspect of the
core references. The notion that risk-taking can result in great success is, of course,
apparent. By taking risks, however, companies are – by definition – faced with a
greater risk of failure. The most dramatic consequence of such failure is that the
company will cease to exist. However, the core references have exclusively focused on
the more positive aspects of risk-taking, thus ignoring the relationship between failure
and risk-taking.
The empirical study presented in this article does not take the EO-failure
relationship into consideration either. In spite of this, no evidence for a significant
correlation between EO and performance, in terms of growth and/or profitability, could
be identified. Thus, the empirical study constitutes another argument for taking on a
more critical viewpoint when discussing the correlation between EO and profitability,
especially in SMEs. The relationship identified between the proactiveness component
of EO and growth in sales and overall performance can be an indication of an
aggregation problem with the EO construct. Other authors have also found that only
some components of EO are correlated to different performance measures. Kropp et al.
(2008), for example, found a relationship between the innovativeness component and
performance, and Swierczek and Ha (2003b) identified a relationship between the
proactiveness- and innovativeness dimensions and performance. There are, however,
some limitations that suggest caution in assessing the findings of the empirical study.
In order to eliminate the elements of subjectivity, the number of control variables is
limited. Caution should also be exercised in generalizing the findings to other A critical
populations. Potential survival bias is another limitation. However, and as argued in examination
this paper, survival bias will most likely weaken the EO-performance relationship.
The purpose of this article has not been to provide a complete review of the
EO-performance literature. The focus has been on the core references that were
identified. However, more recent studies seem to have the same weaknesses in their
methodological constructs as the core references. There are 13 recent publications 323
listed in Table I. Several studies (i.e. Chow, 2006; Keh et al., 2007; Krauss et al., 2005;
Madsen, 2007; Naldi et al., 2007; Poon et al., 2006; Wiklund and Shepherd, 2003) have
used perceptual and/or same-source data regarding the dependent variable. Other
studies (i.e. Hughes and Morgan, 2007; Slater and Narver, 2000; Walter et al., 2006)
have not shown a significant correlation between EO and performance. Jantunen et al.
(2005) and also Kazem and van der Heijden (2006) used objective performance data.
However, these studies analyzed the relationship between internationalization and EO,
and Kazem and van der Heijden (2006) could not find support for any correlation
between EO and profitability. Covin et al. (2006) showed a positive correlation between
EO and growth, based on a study using mainly objective performance data. None of the
studies addressed the issue of the EO-failure relationship in detail, however. Madsen
(2007), for example, conducted chi-square tests similar to those conducted by Zahra
and Covin (1995), but did not conduct any further analysis of the companies that had
gone out of business.
This article has highlighted several weaknesses in previous studies, especially
regarding the relationship between EO and performance in SMEs. The usefulness of
using perceptual performance data, as well as disaggregating the EO construct when
analyzing EO, is an important area of research for future studies. An even more
important challenge would be to conduct longitudinal studies in which non-survivors
are analyzed. It is worth mentioning that the authors of the core references did indeed
discuss the limitations of their studies, which shows an awareness of the complexity of
the relationship between EO and performance in their contributions. Even so, these
studies are frequently referred to when other scholars state that there is a significant
relationship. Thus, the possibly negative consequences of EO have to be addressed.
Until then, I recommend that other scholars should adopt a more cautious approach
when discussing the relationship between EO and performance, or that they refer to
additional studies (if available) that have taken the weaknesses identified in the core
references into consideration to a greater extent.

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About the author

Jim Andersén received his PhD in industrial economics and organization from The School of
Business at Mälardalen University in Sweden. He is currently employed as an assistant
Professor at the Swedish Business School at Örebro University, Sweden. His research focuses on
entrepreneurship and strategic management, in particular resource-based theory and
entrepreneurial strategies. Jim Andersén can be contacted at: jim.andersen@oru.se

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